American monetary policy: Check yourself
The Federal Reserve should respond to lower inflation by holding interest rates steady.
No statement from the Federal Reserve is complete without a promise to make decisions based on the data.
In each of the past two years, a souring outlook for the world economy prompted the Fed to delay interest-rate rises.
And quite right, too.
Yet if the Fed raises rates on June 14th in the face of low inflation, as it has strongly hinted, it would bring into question its commitment both to the data and also to its 2% inflation target.
The central bank has raised rates three times since December 2015 (the latest rise came in March).
It is good that monetary policy is a little tighter than it was back then. The unemployment rate, at 4.3%, is lower than at any time since early 2001.
A broad range of earnings data show a modest pickup in wage growth.
The Fed is right to think that it is better to slow the economy gradually than be forced to bring it to a screeching halt later, if wage and price rises get out of hand.
The rate increases to date have been reasonable insurance against an inflationary surge.
But no such surge has yet struck.
Unexpectedly low inflation in both March and April has left consumer prices no higher than they were in January.
According to the Fed's preferred index, core inflation—that is, excluding volatile food and energy prices—has fallen to 1.5%, down from 1.8% earlier this year. It is now well below the 2% target.
Nor does a surge seem imminent.
For a while, Donald Trump's promises to cut taxes and spend freely on infrastructure made higher rates appear all the wiser.
But fiscal stimulus looks less likely by the week.
Tax cuts are stuck in the legislative queue behind health-care reform, and Mr Trump's administration has tied itself in knots over whether it will increase the deficit.
Meanwhile, the current “infrastructure week” in Washington may generate more headlines than proper plans.
Even so, the Fed is expected to go ahead and raise rates this month.
The markets think there is a 90% probability of an increase of 25 basis points (hundredths of a percentage point).